Challenging separation may bring unlocked value
EARLY last year, Old Mutual announced its attention to restrategise and separate its various businesses. The main reasoning, of course, was to unlock value to shareholders. Two years down the line, with their plans becoming more unambiguous, there is still no movement in the share price. It is where it was three years ago – at R35.50 per share, and down 20 percent from its November 2015 peak of R45.
Usually, a company will be broken up and listed separately because the share price of the company in its current format does not reflect the underlying value. Under normal circumstances, the share price will start rising before the split or unbundling as market participants begin realising the value that will soon be unlocked.
Rightfully the question can be asked why this is not happening to Old Mutual, as the discount is estimated to be around 20 percent of the current share price.
Managed separation
Old Mutual is in the process of splitting into four standalone businesses: Old Mutual Emerging Markets (Omem); Old Mutual Wealth (OMW); Old Mutual Asset Management (Omam); Nedbank. Old Mutual currently holds 54 percent of Nedbank, and intends to retain only 19.9 percent. The rest, valued at around R35 billion, will be unbundled and distributed to Old Mutual shareholders. The new South African holding company, Old Mutual Limited, will house the emerging markets business as well as the Nedbank stake.
The core of this entity is the original South African Old Mutual, and the primary listing will be in Johannesburg and the secondary listing in London. Peter Moyo is the chief executive, and former finance minister Trevor Manuel has been appointed to chair the emerging market’s arm. The other listed entity will be the UK wealth management business Quilter, which will list on the London Stock Exchange in 2018, with a secondary listing in Johannesburg.
Current Old Mutual shareholders will end up with three different shareholdings: the Johannesburg-based business, the UK based Quilter, and Nedbank shares. The plan is then to close the London-based head office by the end of next year.
The rationale for the break-up is to unlock value for shareholders by eliminating the costs and the regulatory burden of a multinational conglomerate. The unbundling and possible subsequent sales of these Nedbank shares is likely to cause an overhang on the market, and the expectation is that the share price will fall.
But given the low valuation levels of Nedbank, any further drop in the share price will likely bring bargain hunters to pick up the shares, limiting a significant drop in the share price.
Uncertainty Unfortunately, there is also the uncertainty of a possible downgrade later this week, and the potential negative effect it will have on the banks is a further negative for Old Mutual’s share price.
Another reason why the share price is not rising is a possible overhang in both the new listings.
Currently Old Mutual is part of the
FTSE100, and not one of the new entities will be part of the index – therefore there will be a lot of forced sales once the unbundling happens.
Current shareholders who had disappointing returns over the past five years should hang on and wait for the value to be unlocked. South African and international regulators still have to okay the deal. Therefore it is not a done deal yet. This is a challenging separation, and a lot of work is still to be done. This might be another reason why the share price is not rising – shareholders want to see that the separation happens.
The two new listed entities will have to prove they can grow, but after the unbundling, management will be able to focus on their core business again, and maybe steer Old Mutual to its previous glory.